We would like to thank Andy Atkeson, Ariel Burstein, Hal Cole, Chuck Carlstrom, Mark Doms, Christian Haefke, Gary Hansen, Ed Prescott and participants at the Research Department at the Federal Reserve Bank of Atlanta and Kansas City, 2006 Midwest Macroeconomic Meetings, 2006 NBER Summer Institute, 2006 ECB-IMOP conference, Society for Economic Dynamics 2004 Annual Meeting and UC Davis for comments. We thank Cara McDaniel for supplying us with her tax rate series. Sonal Hate provided excellent research assistance. Rogerson thanks the NSF for financial support. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the Federal Reserve Bank of Kansas or the National Bureau of Economic Research.